Over a year into the oil price collapse, the upstream energy sector is struggling to survive the economic shock with layoffs, stacked rigs, and new attention to cost-saving innovations in operations and the supply chain. Responding to the industry need for cost reductions, Sourcewater founder Josh Adler created an Internet platform to reduce the largest expense in today’s oil and gas operations – water.
While a Sloan Fellow at the Massachusetts Institute of Technology (MIT) in the Energy Ventures program, Adler learned that ten times more water than oil is produced from the average U.S. well, and water hauling and disposal is the primary cost of onshore operations. Despite this reality, Adler realized that there was no marketplace where operators could obtain immediate, competitive, transparent pricing and supply of water services.
The lack of actionable, accurate data about where and how to optimize water, hauling, treatment and disposal not only meant operators were wasting time and money managing their most important business decisions, but were also missing opportunities to increase water recycling, reduce hauling miles and use non-freshwater, thereby reducing their environmental and community impact. Meanwhile, service companies were missing out on potential sales because they didn’t have up to date information about which operators needed their services on a daily basis.
After extensive research and collaboration with many of the major operators who sponsor the MIT Energy Initiative, Adler formed a team and founded Sourcewater. By creating a hub for water sourcing, treatment, hauling, recycling and disposal, Sourcewater is improving the economic and environmental sustainability of the U.S. energy industry in the face of a persistent oil price slump.
Adler, an experienced entrepreneur, recently spoke with Energy Media Group and shared his perspective on water management, how to thrive as an entrepreneur, and the history and future of Sourcewater.
Energy Media Group: What made you passionate about water management practices in the oil and gas industry?
Josh Adler: I was at MIT in the Energy Ventures program, and one of the first guest lecturers was Dr. Frank O’Sullivan, Director of Research at the MIT Energy Initiative. His presentation was about unconventional energy production, or fracking.
This was in the fall of 2012. He put up a chart that showed how shale gas production had increased about 20 times in the previous seven years and now exceeded all conventional gas production in the U.S.
What struck me about that, besides the incredible curve of the graph, is that it’s something like $200-250 billion dollars of new annual investment just in the U.S. Up from zero just seven years earlier.
EMG: How did learning of the fracking boom lead to developing Sourcewater?
JA: We’ve seen this a few times, like the rise of the Internet in the 90s, or the rise of personal computers and related software in the 80s. But you don’t see that kind of growth in an industry very often in your lifetime. My reaction was, “Wow, how do I get involved?”
Anything that gets that big, that fast… there are going to be gaps. There are going to be mistakes. It’s the nature of rapid growth. There are going to be opportunities to solve new problems that have never been considered before. Those are entrepreneurial opportunities.
The biggest thing that’s new about unconventional versus conventional oil and gas production is the water. Water is now the biggest input and output of the energy production process. So that’s where I felt we should look for the opportunities in the space.
EMG: What led you to the idea of a water marketplace?
JA: I worked on a bunch of different energy-related projects at MIT – new membranes, robots, lasers. Cool stuff but too far out for a startup. Then I was talking with someone working on optimization algorithms for movements of water and wastewater around the well pad.
I said to her, this is great for making water use more efficient on the well pad, but how do they figure out where to get the water in the first place, or where to send it when they are done? Where’s the water yellow pages? Is there some kind of market for buying water so that you can get what you need, when you need it, at some price? What happens when the water supplier falls through at the last minute and you’re paying a frack crew $500k per day to sit on their hands? Or when the disposal pump breaks and the produced water tank is about to overflow? Or the truck doesn’t show up?
The answer was: no, no marketplace. They go knock on doors or call a friend. Then I learned from friends in the industry that it is fairly easy to recycle produced water into new completions in place of freshwater, yet companies with produced water in the Marcellus Shale haul it hundreds of miles to disposal at huge expense while other companies right next door could have recycled that produced water instead of consuming freshwater – better economics and better environmental impact at the same time. That seemed like a winner to me.
EMG: How pivotal was that moment in the creation of Sourcewater?
JA: I was shocked by the absence of market information. Water is by far the largest essential ingredient into and out of the energy production process. How could you have no marketplace in which to find that resource, price it fairly and ensure supply? They have markets for all the chemicals they use, even the sand. Energy companies employ thousands of people and the most advanced software and finance technologies to squeeze the last penny out of every oil and gas trade, yet a $1 savings in the cost of water management is equivalent in their bottom line to a $10/barrel increase in the market price of oil (since the average U.S. onshore well has a 10-to-1 water cut.)
Surely water management should get at least as much attention as energy trading. But it doesn’t. The people who work on it are very capable people, but most companies don’t invest in and prioritize water management the way they invest in energy trading and logistics, even though water management has an order of magnitude greater impact in their bottom lines. Some of this is a cultural legacy in the industry of making money by finding and selling oil, not by managing operational costs. Hitting a gusher or making a deal is exciting. Wastewater isn’t.
It’s not just cultural though. It turns out there is a good reason for the lag in water management investment – the whole issue is new as a survival factor for energy producers. Before the shale boom, there hadn’t been large-scale onshore oil and gas development in the U.S. for decades. All prior developments had been conventional, where only a little water is needed for drilling, and most of the wastewater is re-injected onsite for enhanced oil recovery. You can’t use EOR for unconventional. U.S. energy output doubled from 2009-2014 and almost all of the new production was onshore unconventional, which means all that produced water needs disposal, treatment or reuse, no EOR. So while energy output doubled, onshore wastewater production requiring disposal increased by 10x-20x in just five years. Water as an operating expense exploded.
But no one in senior management noticed. Nor should they have, from a purely rational economic standpoint. When oil is $100/BBL and your total operating expense is $40/BBL, you’d be foolish to spend any time or money trying to figure out how to get your OpEx down by a few dollars. You’d rightly spend all of your efforts on getting more oil out of the ground to make that $60/BBL margin while the sun shines. But in the last 18 months, oil went to $40 and below. The cost of producing it averages about $40/BBL. From half to two-thirds of that cost is hauling and disposing of wastewater. If we can save 10 to 20 percent on water management through a more efficient market and better data, that could make the difference in company solvency. For the first time, just in the past year, water management has become the primary survival issue for U.S. oil and gas companies.
EMG: How does the water crisis in the oil industry today compare to when you were at MIT?
JA: This situation has changed today. Now, we are in a post-boom climate. There’s water all around, but you don’t know about because it’s not freshwater. There are no systems for finding non-freshwater — for buying and selling and valuing it.
No one’s ever had a great use for non-fresh water before. Energy producers have the benefit of being able to use non-freshwater. The best thing they can do, both environmentally and economically, is reuse produced water instead of freshwater. We try to facilitate those non-freshwater trades between energy companies, industry and agriculture. It’s a sustainable way to cut the cost of hauling and disposal and ensure a reliable mission-critical supply chain – having lots of options is a form of insurance.
Sourcewater started right when the commodity markets collapsed and oil and gas prices took a dive. That has turned out to be a great timing for us because now is the first time since the beginning of the shale boom when companies are paying attention to their operating cost, most of which is water related.
EMG: Where do you see Sourcewater in 5-10 years?
JA: I think there’s a tremendous opportunity for water and wastewater markets. The upstream energy industry is a very small user of water compared to power generation, industrial, agricultural and municipal uses of water. Golf courses use way more water than oil and gas. But energy producers spend a huge amount of money on water, mainly because they have to haul and dispose of produced water.
Depending who you believe, that upstream water management market might be anywhere from $20-$50 billion a year, and that’s just what the U.S. upstream industry spends on water management. Probably 80 percent of that expenditure is hauling and disposing of produced water. The energy industry might have higher water expenditures than even the agriculture industry, which uses more than 1,000 times more water than upstream energy does.
EMG: Do you see this water management platform expanding into industries beyond oil and gas?
JA: I do believe that Sourcewater has entered the early stages of what will be a revolution in how water is valued and managed in general, not just in the oil and gas industry. The oil and gas industry is a great place to start building market-based treatment and supply of water resources, but we have an opportunity to expand far beyond that. It’s an opportunity to assist industries to make beneficial use of non-freshwater and wastewater resources so that scarce freshwater resources can be used for essential human and environmental purposes and also an opportunity to incentivize investment in water treatment capacity.
I’ve been spending a lot of time in California lately looking at the water crisis for agriculture and municipalities there. Our marketplace can help. And the energy industry can help – oil and gas in California produces more than 1,000x more water than it uses. Jill Cooper at Anadarko likes to say that water is going to become the third revenue stream from the well pad, after oil and gas. Gas used to be a waste stream, just like water is today. With cost effective treatment and distribution, energy can be a big contributor to solving California’s water crisis.
EMG: When founding Sourcewater, what was most helpful and did you have access to necessary resources, support, and guidance?
JA: I’ve started a few companies over the last 25 years. Some, not all of them, have been successful. Unlike many first-time entrepreneurs, I’m fortunate to have the resources on-hand to accelerate and execute quickly and spend more time on product and customer development, less on fundraising.
However, leaving that aside, MIT does a great job of helping not just students, but really everybody in the ecosystem, to train and support successful entrepreneurs. There are all kinds of programs and networks and information and guest speakers that come to MIT to help people succeed, especially for energy and water startups.
It’s very much about putting research and ideas into practice in the real world. MIT believes that the most effective way to do that is to start new companies that develop and commercialize new technology. They’ve been great at that for generations and have become even better in the past decade.
EMG: What advice do you have for those who are new to entrepreneurship?
JA: I think the most important attribute is persistence. It’s force of will. You have to cause things to happen that have never happened before, and the first answer is always no. Any time you try to cause something new to happen, there’s always resistance against it, inherently – otherwise it would have already happened. It can be hard to decipher whether the resistance is from inertia, fear, lack of priority or attention or timing — factors you can’t control — or whether it is because you don’t yet have the right product, message, channels, pricing, business model, budget or people, factors you can control. Keep trying, but also to keep experimenting and learning. It always takes more time than you expect.